Beyond Pangloss: financial sector origins of inefficient economic booms
Government guarantees of bank liabilities have a long-standing history and are now ubiquitous. We study a model where financial sophistication enhances banks’ ability to exploit government guarantees and fuels inefficient economic booms. Driven by financial engineering, bank rent extraction creates...
| Main Authors: | , |
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| Format: | Journal article |
| Language: | English |
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Elsevier
2024
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| _version_ | 1826314680307548160 |
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| author | Malherbe, F McMahon, M |
| author_facet | Malherbe, F McMahon, M |
| author_sort | Malherbe, F |
| collection | OXFORD |
| description | Government guarantees of bank liabilities have a long-standing history and are now ubiquitous. We study a model where financial sophistication enhances banks’ ability to exploit government guarantees and fuels inefficient economic booms. Driven by financial engineering, bank rent extraction creates a disconnect between lending decisions and borrower repayment prospects: In equilibrium, banks over-lend and only break-even courtesy of trading book profit. Exploitability is affected not only by financial sophistication but also by regulation. Given the pattern for regulatory changes in the last few decades, we posit that the Great Recession, partly, reversed a Great Distortion. |
| first_indexed | 2024-03-07T08:24:15Z |
| format | Journal article |
| id | oxford-uuid:24094281-75f0-4649-a84d-9ace73eeb01d |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-12-09T03:09:05Z |
| publishDate | 2024 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | oxford-uuid:24094281-75f0-4649-a84d-9ace73eeb01d2024-10-08T10:22:52ZBeyond Pangloss: financial sector origins of inefficient economic boomsJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:24094281-75f0-4649-a84d-9ace73eeb01dEnglishSymplectic ElementsElsevier2024Malherbe, FMcMahon, MGovernment guarantees of bank liabilities have a long-standing history and are now ubiquitous. We study a model where financial sophistication enhances banks’ ability to exploit government guarantees and fuels inefficient economic booms. Driven by financial engineering, bank rent extraction creates a disconnect between lending decisions and borrower repayment prospects: In equilibrium, banks over-lend and only break-even courtesy of trading book profit. Exploitability is affected not only by financial sophistication but also by regulation. Given the pattern for regulatory changes in the last few decades, we posit that the Great Recession, partly, reversed a Great Distortion. |
| spellingShingle | Malherbe, F McMahon, M Beyond Pangloss: financial sector origins of inefficient economic booms |
| title | Beyond Pangloss: financial sector origins of inefficient economic booms |
| title_full | Beyond Pangloss: financial sector origins of inefficient economic booms |
| title_fullStr | Beyond Pangloss: financial sector origins of inefficient economic booms |
| title_full_unstemmed | Beyond Pangloss: financial sector origins of inefficient economic booms |
| title_short | Beyond Pangloss: financial sector origins of inefficient economic booms |
| title_sort | beyond pangloss financial sector origins of inefficient economic booms |
| work_keys_str_mv | AT malherbef beyondpanglossfinancialsectororiginsofinefficienteconomicbooms AT mcmahonm beyondpanglossfinancialsectororiginsofinefficienteconomicbooms |